Posted about 7 years ago

Ten Tips for Successful Long-Term Real Estate Investing

1. 
   
2. 1. Ignorance is expensive. What you don't know is costing you money. There are times when we know what we don't know, but there are often times when in fact, most of the time when we don't know what we don't know. The problem is that is you're doomed to follow other people's advice if you don't know if the advice they're giving you is good or bad. It helps you in every aspect. Knowledge will help you become a great investor, if you're just a good investor and it helps you to become a good investor if you're just starting out, or you're hopefully, not a bad investor. That knowledge is what is going to help you ultimately build that past a stream of income, so you can support you and your family and create generational wealth. Rule number one is educate yourself.

1. 2. Many of you have heard this many times over and that is the set investment goals. I can't tell you how powerful that is. It sounds woo-woo, or wonky or ethereal, but the reality is when you actually take pen and put it to paper and you write down, or maybe type it on your computer, what your investment goals, you set some force in motion in the university. You ultimately take what is essentially a wish for yourself and you start to materialize that. You can wish to be rich, but that doesn't mean that you'll ever become rich, or you'll take the steps to be rich. When you set very clear and specific, measurable investment goals, what you're ultimately doing is taking that first step to creating a roadmap and an action plan to become financially independent. This has been proven time and time again. Universities have studied this with people over the years from school age to career, that you are statistically far more likely to achieve your financial goals and become financially independent when you write your goals down. Write detailed goals. They must be specific, measurable, they need to be realistic, they must be attainable and there needs to be a timestamp on it. Now if you don't hit that time, like if you set a one-year goal and you miss it and it took you a year and three months, that's okay. The fact is you actually put in motion the fact that you have a timeframe to achieve that and you're taking the steps to do it. You definitely want to create goals, especially around finance, like your investment goals. How many properties, how many units, how much capital are you going to deploy into other people's projects, whether you own that real estate, or whether it's an apartment syndication, or whatever the case is, write it down. Make it real for yourself.

1. 3. The third thing is something we saw a lot of in 2003, 4, 5 and even into 06. I'm sure you remember this. We had a lot of people who thought they were investors and they were buying a bunch of property here, there and everywhere and watching the price of that property increased through ridiculous appreciation, which was all about speculation. That's my rule is to never speculate. You see, you should always have a long-term perspective in mind and you don't want to be chasing after appreciation. Even in a heated market, that's experiencing double-digit returns, that's not investing, that's just purely speculate. What you want to do is invest for imprudent well-chosen markets, don't chase after appreciation and invest in prudent value plays where the numbers make sense right from the beginning. You want to be cash flow positive from month one. The equity will take care of itself over time, it's just something that real estate does through amortization and through the inflation in the market, which causes appreciation, like natural organic appreciation. Don't be a speculator, because that is not investing. You could get yourself into trouble and we all know what happened in 2006-2007 when people got caught with their shorts down, holding a bunch of properties that couldn't cash flow and they were upside down on them, in terms of equity. Don't speculate.

1. 4. Number four dovetails off of number three. That is to invest for cash flow. There are very few exceptions to this rule. Ultimately, when you invest in real estate you want an immediate return. What do you want? You want cash-on-cash return. The higher that return, the better, because there's different forms of returns with real estate. You have your immediate returns through your cash flow, essentially it's your cap rate, but when you leverage, you have a cash-on-cash return. Then on the backend, you have your appreciation and your amortization, which gives you the equity growth. I like to refer to cash flow as the glue that holds your deal together. Your equity will grow over time, but the cash flow covers all your operating expenses and your debt service, so as time goes on, you have real spendable or investable cash from the property and you can reinvest that. Then as time goes on, you have the true wealth that gets created because of real estate. That's why you should invest for cash flow, because the equity will take care of itself. It happens. The cash flow is that glue that holds your deal together.
2. 
   Listen to the full episode: https://lifebridgecapital.com/2019/09/ws321-ten-tips-for-successful-long-term-real-estate-investing-with-marco-santarelli/
   
   5. The United States is made up of over 400 metropolitan statistical areas. It's a very large country with a lot of markets to choose from. We've all heard the saying that real estate is local. Now there's a lot of truth to that, because what happens in let's say Austin, Texas is different than what's happening in Memphis, Tennessee, which is different than what's happening in Detroit, Michigan. Knowing that all real estate is local and every local market has its own real estate cycle, its own economics, its own business climate, its own tax base, its own supply and demand, you have to understand that all markets operate independently of each other. What you want to do is pick a market that makes sense fundamentally, economically. You should only be investing in markets that makes sense from the beginning and not because you live there. A lot of so-called gurus suggest that you invest within a one or two-hour radius of where you live, that's flawed advice, because you may not be a lucky person in the sense that you live in a market that actually makes sense from an economic and fundamental perspective. It might be overpriced, portability might be very low, the cash flow numbers don't work. If you're buying an $800,000 single-family home like what you find here down where I live, but you can only rent it for $4,000 a month. I'm using single-family homes as an example. You can apply this to apartment complexes as well, just dealing with bigger numbers. Those metrics don't give you the returns that should have in an investment. I'm not suggesting you time the market, but there is an element of timing and you don't want to buck the trend within a market, but you do need to be market agnostic. That's the point is you want your investment capital to work as hard as possible for you, so put it into the markets that's going to protect your investment capital and allow it to grow as reliably as possible.

1. 6. Number six is to take a top-down approach. A lot of investors and I've done this myself, get sold on a property, they get mesmerized. They're talking to somebody, or they come across a property on the MLS for Zillow, and they love the look of it, they love the condition. They look at the numbers on the pro forma and it's very attractive. There are many sketchy properties out there that have great numbers, but it's not a good deal. The whole concept of taking a top-down approach means that you don't start with the property. You start with the market. You start with the market and work your way down to the sub-markets after you've chosen the market. Then you look at the neighborhoods. Then you look at the properties. Then while you're doing all that, you're working with a very high-quality, reputable, trustworthy team. You always start by selecting the best markets that align with your investment goals. Most investors do it the other way around and that's a huge mistake. The best approach is choosing the city or town based on the health of its housing market, you look at its local economy, you look at the job growth within that market, look at unemployment, you look at population growth and then there's organic population growth within a market, plus you also have net migration, or out an inflow migration, which ultimately leads to its net migration. The ideal scenario is to be in a market that has a growing population, so the net migration is positive. Flat is okay, but has a job growth and a diverse economy. You don't want to be in what I call a one-trick pony market, that it's heavily based on oil and gas, because that could be a mistake. Look at North Dakota as an example. When oil was over $100 a barrel, you couldn't find housing. You can barely find a tent to stay in, because there were just so many jobs and people were moving in in the roads, but they couldn't find place to live. Now it's a ghost town, because oil has dropped to $50, $55 a barrel and they just kept all the wells. You want a diverse economy. Then as you work your way down, you drill down, you start to look at the neighborhoods and you look at the amenities, the school districts, the crime rates, renter demand. Most importantly, what is the ratio of rental income in that market, whether it's an apartment complex, or a single-family home, what is the ratio of that rental income to the price per unit? Because that's going to show you and tell you a lot about its return potential. Take a top-down approach. Think of it like a funnel.
2. 
   Listen to the full episode: https://lifebridgecapital.com/2019/09/ws321-ten-tips-for-successful-long-term-real-estate-investing-with-marco-santarelli/
   
   7. You talk to a financial planner. They always talk about diversification, which is really just throwing more money on Wall Street into different paper assets. This line of thinking merit is that you are hedging your risk, but really, you're still investing in more of the same stuff that you have zero control over. When you diversify with real estate, what you're doing is you're diversifying geographically across different markets. Often, that means in different states. I have this rule of thumb that when you're building a real estate portfolio, particularly in the beginning is to invest in three to five in three to five, which means you're investing in three to five properties in one market and you do that, or you can repeat that across three to five markets. At the end of it, all you'll have anywhere from nine to 25 properties. That's a great portfolio. Of course, you can diversify beyond that and build beyond that. Being in three to five different markets is usually good enough for diversification within real estate. The underlying reason is really just to spread those real estate assets across different economic centers. Every real estate market like I said before is local. Each housing market moves independently of one another. When you diversify geographically with real estate, you're essentially just reducing your “risk.” I say it in quotes, because risk is something that you could control with real estate. There's no third-party, counter-party risk. You are a direct owner and that's the beautiful thing about real estate. Diversification just allows you to whether through real estate cycles and economic cycles within the country. That's all it's doing.

1. 8. Well, I actually mentioned management. Use professional management. That's number eight. I don't mean just property management. I mean, professional management. I made the mistake many years ago of using a real estate agent as a property manager in one of my markets. It started off all well and fine, but her full-time interests were involved in buying and selling. Well, not so much buying, but selling real estate as an agent. She wasn't focused on the management side. Then ultimately, things went downhill and she ended up stealing money from me. That didn't work out too well. The key here is to use full service professional management, so that way you can allow them to manage your assets and you can move on with your life, focus on your career, your family and investing in more properties, finding and investing in more deals, more properties, more apartments, whatever it may be. I as a general rule, don't suggest you manage your own properties, unless you know exactly what you're doing and it's ideally local. Although, there are exceptions to this rule. I do know people who do self-manage a portfolio from thousands of miles away. Really, property management if you think about it is a thankless job. It requires a solid understanding of tenant landlord laws. It requires good marketing skills, good people skills. You're dealing with tenants. Sometimes they have complaints or excuses. Sometimes they're late on payment. The way I look at it is your time is very valuable and you should spend that time on your family and your career and looking for more property, not on managing, performing assets that you've already purchased and invested in.

1. 9. Number nine is really about maintaining control. Now this means that you either own those properties in your portfolio in your entities that you control, or you are working with a quality professional syndicator that has those deals, those apartment complexes, whatever they may be in an entity that you are a member owner of. You see, in real estate, you never technically want to own the real estate. You want to control all the real estate. You want it owned in entities that you control, so that's the whole asset protection angle on this thing. The point is that I have issue with large corporations and fund managers that are managing these REIT’s and other Wall Street-driven investments in real estate. I'm not saying they're bad, nor am I saying they're good. I just prefer to have that control through direct ownership and through people that I know that are syndicating good deals. You're less likely to be ripped off, if you have the right relationships and you are a direct investor in real estate, as opposed to leaving it up to fund other fund managers and corporations. I just like the aspect of this asset class, which you don't have with paper assets.
2. 
   
3. 10. This is one of the most powerful things about this in asset class. I know you love this and I love this too. Just imagine that you can invest in something where you can put as little as 20% down towards purchasing an asset and borrowing the other 80% using other people's money, OPM, and actually controlling a 100% of that investment, getting 100% of the cash flow, 100% of the tax benefits, 100% of the equity growth and appreciation, but you've only had to put 20% or 25% down on it. That's the power of real estate and that's what number 10 is all about is to take your investment capital and leverage it, because when you can leverage your investment capital four to one, or five to one, what you're essentially doing is you're magnifying your overall rate of return and you're accelerating the rate at which you create wealth. You can't do that with any other asset class. The fact that you can control income-producing properties, income-producing real estate and borrow the other 75%, 80% is powerful. It's magical. That's the awesome thing about real estate.